Economists?

It's hard for me to know exactly what the readership of this blog is, but at least notionally it's students of econ101ab, which recently had its final examination for 2011-12. Hopefully those who sat the exam and read the blog will carry on, and those who are more casual readers of this blog will also carry on - I'll keep posting sporadically over the summer, and of course pick up again in the Autumn and Winter when econ101ab comes around again.

In the meantime I thought I'd point out a blog post which suggests that "economists tell the EU" that "austerity isn't working".

This blog post is a great example of where you, as first year undergraduates, have already surpassed the understanding of many people in the blogosphere who claim to be qualified enough to talk about the economy. Generally also of the left or right, what they exemplify is an inability to make a coherent, logical argument, and also an inability to distinguish causality from correlation.

The main reason I highlight this is that these are two common failings of many arguments put forward by well meaning folk, undergraduate students included - I'd like to encourage you in your essays as you move through your degree to try and ensure you do none of these things!

The headline says "austerity isn't working", yet no attempt is made to actually establish that fact. It's assumed - like we're having a chat over a pint in the pub. Unemployment is cited as an important factor we need to be concerned about. For sure it is, but how does the blog article, or the pamphlet it is based on, establish that unemployment is caused by austerity? It points out that unemployment is up "since 2008", as if that is the clincher. That is a correlation. We cannot run the UK economy (or the EU one for that matter) since 2008 without the two large policy measures that took place - the stimulus packages of 2008 and the austerity that followed. So it's impossible to know; how do we know the stimulus package didn't set in motion the causal events that led to the increased unemployment?

Now the intent here is not to be deconstructive. What have we learnt in econ101b about the macroeconomy, and hence unemployment? A number of things; early in the course we talked about labour demand and labour supply; we can have cyclical bouts of unemployment, caused generally because real wages don't fall far enough to clear the market, as we would have in a normal demand-supply diagram for a market.

We also learnt about aggregate demand (AD) - the total level of demand in the economy is the sum of a number of things: private consumption (C), investment (I), government spending (G) and net exports (NX). We usually jump from there and say "look, increase G and we increase AD and everything is plain sailing!".

However, we do also discuss factors that help determine, for example, investment - it's a function of business confidence (b), interest rates (r) and potentially also of government spending (either as firms invest to meet demands of government or as they are crowded out - call it g).  So I is a function of confidence, interest rates and government spending in potentially unknown ways: I=f(b,r,g).

The large logical jump the blog article makes is that increasing (or not decreasing) G will solve all the problems in our macroeconomy. Now regardless of what you feel about austerity, and I am personally not particularly keen on it, a case has to be made for why it is bad, and unfortunately the blog article cited above doesn't do that (and neither does this, for space reasons!).

You have to make a number of assumptions about investment behaviour, about consumption behaviour and about the behaviour of the rest of the world in order to arrive at the conclusion that austerity is harmful and that instead we should be stimulating the economy. I'll try and set them out in separate blog posts over the coming days. All assumptions ought to be testable, meaning that it is not inconceivable that real world data could be brought to bear on this issue - which would be a refreshing change from much of the loud voices out there at the moment.

Back in Recession

I'll excuse all my econ101b students for perhaps not being up at this hour, but 14 minutes ago the Office for National Statistics announced that the UK shrank by 0.2% in 2012Q1, following on from the fall in 2011Q4, which means that officially, the UK is in recession - again.

The Twittersphere is, of course, awash with response.  I had searched for UK GDP and was getting more than 20 new tweets appearing per second:

Does it really matter though? What exactly is this? Recall GDP is the value of final goods produced in the UK over a particular time period - here the first three months of 2012.

The ONS has released information based on 40% of its full data for the UK for the first three months of the year - so it's possible that later the number will be revised as the remaining 60% of the data is used to calculate more precisely how much was produced in the UK over the last three months.

The important thing however is not to jump on these figures, as many will in the Twittersphere, and draw premature conclusions. Yes, the Coalition did embark on austerity, and many did warn a recession may be the consequence (I warned of it but didn't actually think it would happen because so many unexpected events happen). However, many other things are happening - austerity elsewhere, the eurozone crisis, and we as consumers may well have changed unrecognisably over the last few years in response to the crisis.

It is possible that this number will eventually be revised so substantially that it's positive - either way however, what it reveals however is a generally rather bleak picture of economic activity in the UK; as Chris Dillow (@CJFDillow) tweets:

Obsession with small drop in GDP is statistical fetishism. Even if GDP had grown 0.2% in Q1, it would still have been a poor performance.

 There will be plenty of comment on this over the coming days; if you are preparing for the econ101 exam, be careful how you make use of it! Stick to reputable journalistic sources rather than bloggers - FT, Economist, perhaps the Guardian and the Telegraph at a stretch.

Petrol

Also now fading from memory is the panic buying of fuel of a couple of weeks back - but as a refresher, it was announced a week before Easter that drivers of fuel trucks may strike, prompting government ministers to suggest panic buying (hard to believe, but true - Francis Maude even suggested filling up some jerry cans and putting them in the garage!).

The result was predictable - panic buying, queues everywhere, shortages and chaos.

So if this was so predictable, why on earth did the government do it?

There's at least two reasons which are quite plausible to my mind. The first is bumping up GDP figures, and the second is managing public opinion.

The first was noted by the Liberal Conspiracy blog (although strangely I can't find the link to it anymore...) - the panic buying happened in the last few days of March, and March being the third month of the year, is the last month in the quarter, and we calculate GDP by the quarter. 2011Q4, the previous quarter, saw negative growth, and hence if this quarter also saw negative growth (and the OECD had said they expected it), then this would mean the UK was back in recession.

Hence if people were to buy lots of petrol, this would count as lots of output sold, expenditure made, incomes earned (the three ways to calculate GDP). Is it possible the government decided it could influence GDP figures to ensure that the UK didn't enter a recession?

A perhaps slightly less far fetched suggestion is that the government was instead trying to manage opinions.

The simple fact is that two sides are trying to bargain some pay agreements, and hence the media management of both sides is to try and get the public onside.  You may have seen blurbs to the following effect on Facebook:

So let me get this right, 2000 tanker drivers are complaining that 45k a year and a final salary pension, is too little for a dangerous job? Yet our boys and girls out in Afghan get 24k or there about to get shot at? Round the 2000 tanker drivers up, send em out to Afghan, then ask 2000 soldiers if they want to earn 45k a year driving a fuel tanker about. Problem solved.... repost if u agree.

On the other hand, the truckers do have a story to tell too, again found via Liberal Conspiracy (a leftie blog which I'd treat with some caution - they don't have the kind of economics tuition you've already got in your first year alone at university).

The government in its announcements led to panic buying and general public resentment against the fuel tanker drivers, hence succeeding in its objective, to get public opinion on their side against any actual fuel strike that might happen. If the representatives of truck drivers realise how unpopular any decision to strike would be, their bargaining position is significantly weakened.

So, both possibilities are very much in the realm of conspiracy theory, but both are interesting and contain a good chunk of economics...

Stamps

Things have been a little quiet on here of late, although many interesting things have been happening for the keen economist in recent weeks and months, not least the recent panic buying of stamps (alongside petrol), prompted by an announcement that Royal Mail will increase the price of stamps by 30%. Sloman's economics blog comments on this here, and notes the public outrage at the price moves, with the word "profiteering" appearing at least once.

It's quite odd how a loss-making business can be accused of profiteering, but that's another matter.

The bottom line is that there exist other ways of sending information, and perhaps there have never been as many as there are now, and not surprisingly Royal Mail has felt the pinch. The optician concerned about the cost of sending out thousands of mail shots ought to perhaps consider alternative means of getting that information out - emails, phone calls, or even just other mail companies other than Royal Mail.

The reason the stamp price hike seems to great is that before now Royal Mail haven't been able to, because of the regulator restricting how much they can increase prices by. While it might be argued that by keeping the price low, Royal Mail gets more customers, it is clearly the case that folk are not influenced by price alone when decided how to send information - if they were, then Royal Mail wouldn't have been making losses with such apparently attractive prices.

Royal Mail needs the flexibility of not having so many of the things it can do so heavily regulated if it is to adapt and survive in an age of rapidly advancing technology.

Bristol Pounds and Bitcoin...

Quite late on the scene, please accept my apologies, we're looking at money these coming two weeks in classes, and different money systems - not necessarily in different countries either. Usually we think about different money in different countries - dollars in the US, pounds in the UK, euros in the eurozone and yen in Japan, for example. However, currencies (monies) needn't be attached to some geographical area, and Bitcoin is one example of this - it's an online currency primarily, used for online trades. The Bristol pounds that we've seen before, these are geographically limited though - just to the Bristol area.

Essentially, what we try to do as economists is analyse economic objects such as this (and the objects we look at needn't be economic either, it's worth pointing out). We boil any kind of money down to what it is, at the end of the day - some good that for whatever reason is used as money. Why do people use some goods as money? We have the three properties discussed in the lectures - medium of exchange, unit of account and store of value. If some good satisfies all three it may be used as money. Hence the example of cigarette money in WWII. It satisfied the properties required of money and hence was used in that way. It remained a good that could be consumed, but of course smoking those cigarettes meant you could no longer use them as money.

So, to what extent do our two candidate currencies satisfy these characteristics? With the Bristol pounds, it's not clear yet whether people will start using them - if they do, they will have to have begun to view them as a medium of exchange. Will Bristol folk, and Bristol enterprises, start taking up these things? There's no compulsion upon them since their alternative is to use standard, universally accepted Pounds Sterling (which, by the way, bears no reference to the Scottish town, it seems). This fact of course doesn't rule them out as becoming of great use, but provides one sceptical note on their potential uptake. There's little doubt that since the Bristol Credit Union will be backing these Bristol pounds at 1:1 with Pounds Sterling, that provided the Bristol Credit Union remains solvent both the unit of account and store of value will remain - provided also that the pound doesn't dramatically lose value in the comings weeks, months and years.

So, can you perform the same thought process for Bitcoin in your assignments?

Trade Gap and QE

Two bits of news today relating to the macroeconomy; first the Bank of England is extending Quantitative Easing (QE), its programme of pumping more money into the economy, by £50bn. Second, the UK's trade deficit has fallen to its lowest level since 2003.

On the first, QE is an attempt by the Bank of England to stimulate the economy. This works in the way we discussed in lectures last week, as the Bank prints new money and uses it to buy government bonds and other types of assets from banks. This turns assets the banks have into liquid form, ready to be used to provide cheaper credit to the wider economy via loans. In doing this now for a number of years, the Bank has amassed a balance sheet on a monumental scale - the assets its procured are equivalent to over 20% of UK GDP (national output).

We're going to discuss much more about monetary policy later in term, but QE is not part of conventional monetary policy; the Bank of England in normal times would make use of the interest rate to influence the economy, yet currently interest rates are as low as they can practically go (we can't have negative nominal interest rates as that would imply banks deducting money from savings accounts and paying borrowers to borrow). So in an attempt to still influence the economy, it has embarked on QE.

Turning to the trade deficit, this is the balance of goods and services, or our exports of goods and services minus our imports of them. For many years now the UK has run a substantial trade deficit, importing more than it exports. Theoretically, this ought to lead to a depreciation in the pound since there's less demand for pounds, and we supply them to buy imports in foreign currency. However, that analysis doesn't include demands and supplies of pounds from the financial sector and so despite this trade deficit, the pound hasn't depreciated. In fact, it only had one, substantial depreciation in the entire period, which was at the time of the financial crisis, in 2007-08, when the pound lost 25% of its value against its major trading partners.

Such a dramatic devaluation would be expected to have impacted trade since it makes imports for us more expensive, and exports less expensive, yet for a long time there was no pick up in UK trade - the deficit remained large. This could have been because of a lack of overseas (eurozone) demand for our goods, it could have been because our exports are produced with many imported inputs, or that the price elasticity of our imports is low, or for a whole host of other reasons.

Either way, it appears that at long last, the effect of that devaluation may be filtering through. That or we're just spending less as well as those elsewhere spending less.

Sloman is from Bristol!

I've already mentioned this new initiative, launching a new currency in Bristol. You'd almost think they timed the announcement to coincide with econ101b! It turns out that the main author of our textbook, John Sloman, is a Bristolian, and on the Sloman blog he's just written a bit about the Bristol Pounds being minted as I type...

What I mentioned in the lecture was that while the Bank of England only accepts the real thing, i.e. Pounds Sterling, that doesn't mean we can't deal in our own currencies - provided when we deal with the Bank (via our own bank usually), it's in Pounds Sterling. So this little initiative can exist because the Bristol Credit Union stands behind it, willing to issue Pounds Sterling on a one-to-one basis with Bristol pounds.

Sloman refers to a few people who are justifying the new initiative because Bristol doesn't want to become like a clone town - all the other British high streets that have chain stores everywhere and look alike.

However, and please do (yet again) excuse my cynicism on this, but this is a very static argument. The Local Data Company has just released a report on the health of the retail industry in the UK and it makes quite chilling reading; in some areas as many as one in three stores in a shopping centre is empty. The high street is currently changing beyond all recognition, suggesting more than anything that the "clone" model of saturating the high street with well known brands, may not have been overly successful.

Of course, it may simply mean that stronger branded stores take over more of the empty space (e.g. Tescos and Sainsburys), but the sheer volume of excess supply means prices must come down, encouraging small local retailers to set up shop.

So an initiative such as a local currency, which restricts what its users can do with it (spend within Bristol or else!), may not be particularly useful in achieving what the market may achieve on its own!